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Weekly Gold & Silver Market Recap for March 2, 2012

The big event in precious metals this week took place on Wednesday, as Gold and Silver experienced drastic sell-offs after testimony by Federal Reserve Chairman Ben Bernanke, before the House Financial Services Committee, indicated that the Fed is not likely to consider a third round of quantitative easing. The price of Gold dropped over $90, bringing the metal under $1,700 for the first time since late January. By Thursday, however, precious metals prices had rebounded, with Gold once again above $1,700. Standard Bank’s Walter de Wet said, “We had a sense that the Gold market was increasingly pricing in QE3, and obviously Bernanke has put a dampener on that.” But the drop in prices strongly pushed physical sales of the metal, with one dealer saying, “It’s been a long time since we (saw) such decent buying.” Julian Jessop of independent macroeconomic research consultancy Capital Economics called the movement by the metals overdone and said that he feels the appeal of Gold will make up for the unlikelihood of a QE3. Referring to that appeal, Jessop said, “It is the risk of a renewed escalation of the eurozone crisis that underpins our forecasts.” Analysts with bullion broker Sharps Pixley in London suggested that yesterday’s Gold pullback could be a window of opportunity for investors looking to get into Gold, saying in a note to clients, “The long-term Gold story remains unchanged.”

Another factor that contributed to the fall in Gold’s price on Wednesday was the news that the European Central Bank infused nearly a half-trillion euros into the banking system. Laurent Fransolet at Barclays Capital said, “The astonishing number this time is the number of banks participating, which signals that a lot more small banks looked for the money, and it is likely they will pass it on to the economy.” This release of funds from the ECB is designed to allow more time for European politicians to solve the eurozone’s financial crisis. On Friday, 25 of the 27 European Union countries signed a fiscal pact which states that all countries are to write a golden rule regarding balanced budgets and to put those into constitutions or laws. European Council President Herman Van Rompuy said that the agreement “helps prevent a repetition of the sovereign debt crisis.” However, that raises a question: Doesn’t the crisis have to be over before a repetition can occur?

There is concern that rising oil prices could put the brakes on a fragile global economic recovery. The United States has experienced sharp price hikes at the gasoline pump of late, and there are those who speculate we could see $5 per gallon gasoline during peak driving season this summer. It is worth mentioning that in the longer term, the Gold price has a positive correlation to the price of oil. The global economy stands on a precipice of uncertainty surrounding oil. A U.S. advisory body has found that trade sanctions against Iran already are having an effect before they have officially started. There is talk of supply shortages, which will only drive prices higher. The biggest customers of Iranian oil — China, Japan and India — are entangled with the U.S.-led sanctions. Another key issue is that OPEC’s supply is fulfilled by Iran, which is the second-largest OPEC producer behind Saudi Arabia, so any additional supply is going to be limited.

The German Parliament voted in support of the second round of the Greek bailout rescue package this week. German Chancellor Angela Merkel stressed the importance of assisting Greece rather than pushing the country out of the eurozone, as some German lawmakers had suggested. Merkel said if the euro is not successful in the future, it could possibly jeopardize the European Union and the global economy. In an interview given on Tuesday, Pimco CEO Mohamed El-Erian stated his view that the Greek bailout package will probably fail, and said that the real issue now if Greece’s debt crisis can be contained or if it will spread to other countries in the eurozone. In a report prepared for the Group of 20 nations the International Monetary Fund (IMF) stated that economic hazards in Europe still threaten the recovery of the world economy, which it said faces “major downside risks.”

In Middle East news this week, there was even more violence in Afghanistan, as a suicide bomber killed nine people in an attack on a military airport. It is believed that the bombing is another revenge response by the Taliban for recent burnings of the Koran. The U.S. Embassy is warning that there are heightened risks for U.S. citizens in Afghanistan. The uprising in Syria continued to be met with brutal force from forces loyal to President Bashar al-Assad. French Foreign Minister Alain Juppe believes that Assad’s government had “broken all the limits of barbarism,” and expressed his frustration about the inability to obtain security guarantees to evacuate wounded civilians and Western journalists from the opposition stronghold of Homs. The French Foreign Minister warned Assad he would be brought to justice and suggested it was time that the International Criminal Court become involved.

Also in the Middle East, some nations are struggling to comply with United Nations sanctions against Iran. According to U.S. Secretary of State Hillary Clinton, some allies face unique situations in the effort to reduce Iranian oil imports. “I think that there’s a very clear-eyed view of Iran and Iranian objectives, and that’s why the president’s policy is so clear and adamant that the United States intends to prevent Iran from obtaining a nuclear weapon.” Iran has previously threatened to counter sanctions either by military force or by blocking the Strait of Hormuz, which could severely impact the transportation of oil from the most oil-rich region in the world. Meanwhile, an election in Iran on Friday of this week highlighted growing tensions between that country and Western nations. Supreme Leader Ayatollah Ali Khamenei called on his country’s citizens to vote, as he said, “The arrogant powers are bullying us to maintain their prestige.” U.S. President Barack Obama is scheduled to meet with Israeli Prime Minister Benjamin Netanyahu in the coming days. Israel has been very outspoken about their willingness to use military force to prevent Iran from continuing its nuclear program, and Obama is worried that such an attack may be premature.

Here in the U.S., the durable goods report for January was released this week, showing a 4% drop in orders for long-lasting goods in the U.S., which is the biggest drop in three years. In a time when the fragile economic recovery seems to hinge on every little news item, this report’s effect may be a significant one. News that the Conference Board’s consumer confidence index increased more than forecast offset early worries over durable goods orders and led to an increase in stocks around the globe. However, not everyone viewed this development as rosy. HighTower’s VWG Wealth Management’s Managing Director Richard Weeks said, “I don’t have rose-colored glasses on, but I think the path of least resistance is up. Short-term, all signs say that risks have been reduced.”

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